GWEN IFILL: The $85 billion student loan industry is under fire for questionable financial dealings between some colleges and lenders. Financial aid officers at several schools, including Johns Hopkins and Columbia Universities, were put on leave after a New York state probe found a lender was giving out stock grants, kickbacks, fees, and all-expense-paid trips.

The company in question, Student Loan Xpress, has been on these schools’ preferred lender lists. For more on this story, we turn to freelance writer Anya Kamenetz, author of the book “Generation Debt.”

Anya, welcome.

ANYA KAMENETZ, Author, “Generation Debt”: Thanks for having me.

GWEN IFILL: So explain the arrangements that sprung up between these colleges and these lenders and the students involved.

ANYA KAMENETZ: Well, in theory, as a college student, you have the right to borrow your federal student loans from any one of the dozens of lenders on the market. But in practice, the way it works is that college students go to the financial aid offices, who put together a package of student aid, loans, grants, and they often provide the student a list of the preferred lenders that that college works with.

In theory, once again, these preferred lenders are on that list because they offer the best deals to students. But, in reality, as we can see, the deals are really going on between the financial aid offices and the lenders.

GWEN IFILL: So who cuts the deals? Is it the college themselves or is it just something that these financial aid officers are allowed to do on their own?

ANYA KAMENETZ: We are seeing both. We’re seeing situations where colleges as a whole are profiting. Their budgets are being swallowed by the loans that are being taken out. We’re also seeing situations where financial aid officers are accepting inducements from small inducements, like a ticket to a game, to big inducements, like sending someone to graduate school.

Colleges may be acting outside law

Anya Kamenetz

Author, "Generation Debt"

Now, you see one small indication in the fact that a few colleges have agreed to repay $3.27 million to students on private loans that they received a kickback on, and instead of that incentive going on to the students directly.

ANYA KAMENETZ: That's right. And the interesting thing about that is that Ellen Frishberg at Johns Hopkins, she's been lauded as being a student advocate. She's appeared at student advocacy workshops and organizations. And she's really playing both sides of this.

The financial aid officers are seen in many situations as being the main source of information for students. And that's why it's so troubling to see that they have other kinds of relationships, other kinds of loyalties.

GWEN IFILL: So how much more expensive does this make this for students who are grappling with some pretty amazing expenses as they get ready to go off to college anyway?

ANYA KAMENETZ: Well, the costs are difficult to measure, because you're looking at just one corner of a whole iceberg of a situation where the student loan business carries billions of dollars in federal subsidies. Parts of these subsidies are being kicked back to colleges in the forms of these inducements rather than being passed on as discounts to students.

And so the potential downside for students is enormous. Now, you see one small indication in the fact that a few colleges have agreed to repay $3.27 million to students on private loans that they received a kickback on, and instead of that incentive going on to the students directly.

GWEN IFILL: Without admitting that they did anything wrong?

ANYA KAMENETZ: That's right. They haven't admitted wrongdoing. And this is a case where, you know, colleges are acting outside the law. The law has not caught up. And that's exactly what we're working on right now.

Extending beyond New York

Anya Kamenetz

Author, "Generation Debt"

Why isn't this a national investigation? And I believe that's because the corruption goes higher. It goes into the Department of Education. There are many former lenders who are in the Department of Education.

GWEN IFILL: Well, is it outside the law or is it merely unethical?

ANYA KAMENETZ: Well, I guess that's going to be up to the courts to decide. There were hints today from Andrew Cuomo's office that there's going to be some criminal investigation, some fraud investigations, as well. But whether it's going to be in terms of a fraud investigation or just new regulations, I think that, you know, some change is in the offing for sure.

GWEN IFILL: You're referencing Andrew Cuomo, the New York attorney general. Is this widespread? Is this extending beyond, say, just New York?

ANYA KAMENETZ: Oh, absolutely. And it's interesting, actually. It's not just a state investigation. Cuomo has been in contact with a hundred colleges all over the country that he believes are promulgating these relationships with students that have agreed to sign a code of conduct.

And so what's interesting to me is, why isn't this a national investigation? And I believe that's because the corruption goes higher. It goes into the Department of Education. There are many former lenders who are in the Department of Education, and that's why we're not seeing the oversight on the federal level that we'd like to.

Student Loan Sunshine Act

Anya Kamenetz

Author, "Generation Debt"

The Student Loan Sunshine Act, it would basically increase the requirements for full disclosure, so that, when a name appears on a preferred lender list, the student knows exactly what relationship exists between that college and that lender.

GWEN IFILL: That's a strong statement, saying there's corruption involved in the Department of Education. Explain what you mean.

ANYA KAMENETZ: Well, Matteo Fontana, who is charged until recently with overseeing the National Student Loan Data System, he's one of the officials who's been placed on paid leave, after it was found out that he was holding tens of thousands of dollars of stock in Student Loan Xpress, which is this lender company.

GWEN IFILL: So does this work the way -- say, pharmaceutical salesman go into a doctor's office, and they recommend their brand, and the doctor then recommends it to his patients. Is that kind of what this is like, the students don't realize that there are other options? They think these are the only options of this preferred lenders list?

ANYA KAMENETZ: That's exactly what's going on. About 90 percent of the students borrow from the preferred lender list.

GWEN IFILL: So is there a federal investigation in the offing?

ANYA KAMENETZ: I would like to say so. I know that Congressman George Miller's office is very interested in this. Ted Kennedy's office has expressed interest in this. And so there's a Student Loan Sunshine Act, which is currently in Congress.

GWEN IFILL: What would that do? I'm sorry, what would that do?

ANYA KAMENETZ: The Student Loan Sunshine Act, it would basically increase the requirements for full disclosure, so that, when a name appears on a preferred lender list, the student knows exactly what relationship exists between that college and that lender.

GWEN IFILL: And so when it comes to the point of the lenders, how do they make money off of an arrangement like this, just by elbowing out the competition?

ANYA KAMENETZ: Basically, that's it. The financial aid officers have the power to deliver very large numbers of students as, you know, basically bundling business, bundling a bunch of customers together. And so it's far more efficient for the student lending company to market itself to colleges rather than market itself directly to students.

Looking for independent lenders

Anya Kamenetz

Author, "Generation Debt"

I think that the key to take home and really one of the silver linings of this investigation is that parents learn that they have an option. They can borrow from anyone out there in the market.

GWEN IFILL: OK. So you're the parent of a student -- you're not old enough for this, but assume you're a parent of a student who's about to go off to college. And they try to make decisions, some critical financial decisions about how to pay for college. What do you advise that they do when they're presented with this option of how to pay for it?

ANYA KAMENETZ: I think that the key to take home and really one of the silver linings of this investigation is that parents learn that they have an option. They can borrow from anyone out there in the market. There are independent lenders out there that are marketing to students. And they just have the ability to go on the Web, and look around, and make sure that they're getting the best deal.

GWEN IFILL: Now, when you have to make your other big decision expense in this life, which is buying a house and getting a mortgage, there are places where you can go and compare mortgage rates. Is there places like that for student loans, as well?

Federal student loans, the interest rate tends to be the same. It's pretty much set by federal government, 6.8 percent. And there's not much competition in interest rates. But you can go online to the various lenders, and there's a list at FinAid.org -- that's another independent Web site -- and compare the various terms and incentives that they do offer.

GWEN IFILL: OK, bottom line, in the end, how much more does this cost a student after four years of college? How much does it drive up the cost of tuition?

ANYA KAMENETZ: Well, I mean, it's hard to say exactly how much the subsidies drive up the cost of tuition. I think that it has to be decided on a case-by-case basis.

GWEN IFILL: OK. Anya Kamenetz, thank you very much for helping us out.

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